During late 2008’s
unprecedented
financial-market panic, gold got something of a bum rap. Since this
metal didn’t soar during the stock chaos like most of its investors
expected, many assume something must be wrong in gold-land. But
gold ultimately did hold its own, up 2.1% in Q4 while the S&P
500 plunged 22.4%.

During the very
heart of the stock panic when gold looked the weakest (under $750),
it was being driven down by a bear-record US dollar surge. A mass
exodus of flight capital fleeing the burning stock markets roared
into US Treasuries for a temporary safe haven. Foreign investors
joining this deluge had to buy dollars first, forcing a mighty
dollar rally to erupt that traders interpreted as a sign to sell
gold futures.

I discussed this
temporary panic-driven dynamic in depth back
in late October.
But a knock-on effect of this episode was a great deal of
distortion, both technically and psychologically. Like everything
else, gold is denominated in dollars. So when an epic anomaly of a
dollar surge snowballs extremely rapidly in a matter of weeks, it is
really going to alter investors’ perceptions of what is going on in
the gold market.

Like a funhouse
mirror, gold’s technical action during the stock panic was a
fleeting distortion of underlying
fundamental
realities. It is hard to understand what gold is really doing
without first exiting the hall of mirrors. This means considering
gold’s Q4 panic action in its long-term context outside of the
tyranny of the US dollar. This is especially challenging for
Americans (me included) since we can scarcely think outside of our
lifelong dollar framework.

Over the years
I’ve tried to expand my own extra-dollar understanding of this
secular gold bull by studying its progress in other major
currencies. Since the stock panic’s impact on gold seemed so
confounding to those of us conditioned to think of gold only in US
dollar terms, this week I decided to update our
global gold
thread of research. Did gold really perform as poorly as we
Americans saw on our dollar-gold charts?

To find out, I
built 10 gold-bull charts denominated in 10 different currencies.
They all represent either globally-recognized elite currencies or
relatively strong regional currencies used by large fractions of the
world’s population. Because local supply-and-demand dynamics can
cause gold prices to vary a bit within each currency’s sphere of
influence, I used forex-implied gold prices rather than
averaging countless series of local-currency gold-price data.

For the better
part of a century now, the global gold trade has been dominated by
the US dollar. This will change sooner or later thanks to the US
Fed trying to destroy the dollar with exponential fiat-money-supply
growth and zero yields, but it still holds true for now. Because of
this, all over the world the prevailing gold price is a function of
any currency’s exchange rate with the US dollar along with the
dollar price of gold.

In addition to the
local-currency gold price rendered in blue, each chart shows that
currency’s exchange rate with the US dollar in red. If necessary I
recast a currency’s exchange rate out of its customary form so a
rising red line always shows strength relative to the dollar and
vice versa. In addition, for comparability all gold prices are
units per troy ounce even if atypical in a particular
currency’s regime. As always, we’ll kick off this exploration with
the usual US dollar gold price as the baseline for other currency
comparisons.

American gold
investors can draw this chart from memory. It shows gold nearly
quadrupling in US dollar terms since early 2001, a phenomenal
bull over a 7-year span where the S&P 500 eked out a pathetic 11%
gain! This bull has had
two stages,
which are quite distinct above. Initially in Stage One, gold was
largely driven by the
US dollar bear.
But subsequently in Stage Two, investment demand usurped the dollar
to gain gold’s driver’s seat.

Note the mighty
Stage Two uplegs since mid-2005, both of which erupted while the
dollar was relatively flat. And between early 2004 and late 2006,
gold soared from the high $300s to the low $600s during a span where
the US Dollar Index merely consolidated sideways. This was
the transition
between stages as investment demand took over from the dollar bear
as gold’s main driver. This emancipation of gold from the dollar’s
shackles is very relevant today.

Back in July 2008,
the US dollar started rallying. It wasn’t for fundamental reasons,
but because the giant mortgage-backed bond industry was imploding
and bond investors desperately sought the safety of US Treasuries.
This kicked off the massive dollar panic rally in Q3, and the
subsequent stock panic of Q4 accelerated it. Until this anomalous
rally erupted, dollar gold remained strong in the high $800s and low
$900s. As you can see above, all gold’s panic weakness simply
mirrored the dollar’s unnatural strength.

At this dollar
rally’s apex on the very day the stock markets bottomed in
late November, the US Dollar Index had reached levels first seen in
early 2004 when gold was near $400. Yet gold didn’t even
close under $700 in 2008’s panic, vastly stronger than the dollar
alone would suggest it should be. Once again this highlights the
critical fact that the dollar is no longer gold’s primary driver
even though it can still temporarily influence gold at times.

Nevertheless, gold
denominated in dollars still fell in the heart of the hyper-fearful
stock panic. But gold’s panic behavior certainly did not look like
this for everyone. Many major currencies fell much farther than the
dollar rose. This disproportionality drove local-currency gold
prices to new bull highs. Gold’s behavior during the stock panic
may have disappointed Americans, but around the world it looked
radically different.

Canadian gold
investors didn’t have much to complain about. By early October,
their local gold price had already exceeded its C$1003 high of March
2008 (marked with the green 7 above). The Canadian dollar fell so
far relative to the US dollar that local gold surged despite all the
dislocations in the global currency markets. The Canadian-dollar
carnage in this panic was so bad that it shattered its bull’s
secular support that had held since 2003.

By the end of
2008, Canadian-dollar gold was again hitting new bull highs. Up
174.9% since this bull began, gold has been a brilliant investment
for Canadians this decade despite the bull market in their
currency. This equates to 0.60x the gains seen in US dollar gold,
as the yellow ratio under the blue gain above shows. And this is
very impressive with the Canadian dollar’s gains running 1.86x as
large as the US dollar’s losses.

So in Canada, as
in much of the world, it wasn’t gold that was weak during the stock
panic but the local fiat currency. Considered from another angle,
this means that gold’s weakness in US dollar terms was actually
modest relative to the US dollar’s mighty gains on the global forex
markets. Canadian investors saw a very different gold picture than
we’ve seen in the States, as did those in South America’s leading
market.

The Brazilian real
fell so sharply during the stock panic that it looks like a crash on
this long-term chart. Yet real gold remained very strong. Not only
did it not break below its secular support, but it rocketed
to new bull highs dwarfing those seen in March 2008. Incidentally,
the tops of all the major US-dollar-gold uplegs are labeled
in all these charts for comparison. Green numbers denote higher
local-currency gold highs while red ones show lower ones.

The Brazilian real
is a regional currency at best, and few investors would consider it
strong despite its secular bull. Yet for much of South America,
this is how gold’s performance during the stock panic looked. This
will drive all kinds of new South American interest in gold
investing, as nothing sucks in new capital like dazzling
performance. This is exactly what American investors wanted to see
in October and November 2008, a blisteringly fast gold spike to
radical new gold highs.

Unlike the
Brazilian real, the euro is one of the strongest and best fiat
currencies on the planet today. It too got hit hard by the
anomalously intense dollar panic rally. But check out euro gold!
Not only did it not fall far even during the stock panic’s darkest
days, but it soon surged to new bull highs above March 2008’s! And
even after hitting the mid-€600s right away in early October, euro
gold hasn’t given much back since. Even in late December as the
stock panic faded, euro gold was still trading near its previous
March highs.

In euro terms,
gold’s new mid-panic highs extended its secular bull since early
2001 to a fantastic 142.5%. This was in the face of a strong euro
secular bull too, where the currency itself was up 90.9% at best.
This just goes to show that even in the second-most-popular global
currency, gold’s bull has been outstanding. Since Stage Two dawned
in mid-2005 and euro gold
broke out above
its old €350 resistance, gold has been one of the best investments
for European investors to own.

In addition to
Europe’s 327m people who view gold through the lens of their euro,
hundreds of millions of more people around the world use the euro as
their primary currency. And this popularity will only grow as the
dollar fades from prominence thanks to the Fed’s madness. For this
huge and growing block of investors that include ultra-wealthy
Middle Eastern and Russian entities (including central banks), euro
gold is how gold looked during the stock panic. And it is pretty
darned impressive!

Euro gold’s strong
performance through the most difficult market episode in modern
history will get many more euro users interested in gold investing.
If I could pick a single chart to represent how gold really
performed in the global stock panic in dollar-neutral terms, this
euro-gold one would be it. American investors would do well to
consider gold’s recent performance in euro terms if we want to
separate out the distorting effects of the enormous panic rally in
the US dollar.

Britain remains a
global financial powerhouse, with London still the world’s financial
capital in some markets including gold. Yet the stock panic seemed
to affect investors holding assets in the pound sterling
disproportionately hard. The pound essentially crashed during the
dollar surge which drove pound gold up to dazzling new bull highs.
How high? Pound gold rocketed to its highest prices seen since
at least 1717 when records started being kept! You can’t ask
for better gold performance than this in a financial panic!

Provocatively this
pound-gold price is extremely relevant. The pound is the
third-largest reserve currency in the world today after the dollar
and euro. It is also the fourth-most-traded currency in the world
after the dollar, euro, and yen. These stellar gold prices are
driving huge gold investment demand in Britain which ought to
accelerate. The more average British investors realize how well
their peers are doing in gold, the more capital they will invest in
it. High and rising prices render assets extremely attractive to
investors.

And since London
is the center of the world gold trade, the pound-gold price’s
influence extends far beyond the direct users of this currency. A
new gold rush in the UK could have a profound bullish impact on gold
worldwide. It is fascinating to realize just how different
investors who think in pounds perceived gold’s stock-panic
performance than those of us trapped in the fading US-dollar
paradigm!

Out of all 10
major currencies, only Japan and China saw relatively poor gold
performance similar to the States. In Japan’s case, its government
has been trying to drive the yen down in concert with the US dollar
for years to help its massive export industry. Nevertheless, the
yen got away from it during the stock panic. It just soared along
with the dollar. There is no dollar-yen peg of course, and the
yen’s bull market started way back in mid-2007 a year before this
latest dollar surge erupted.

Interestingly a
sizable fraction of this yen strength occurred after the stock panic
started abating in late November. This suggests the very weak
yen-gold prices in late 2008 were partially the result of Japanese
companies repatriating capital for year-end. In this chart you can
see that the yen tends to rise late in most years. Regardless of
its cause though, the average Japanese investor probably feels worse
about gold’s panic performance than we Americans do. This will not
help gold investment demand in Japan.

China saw similar
poor panic performance. Of course the yuan was hard-pegged to the
dollar until mid-2005, which is probably not incidentally right when
Stage Two of the dollar-gold bull dawned. Since then the yuan has
been rising in an accelerated fashion against the weakening US
dollar. Provocatively though, since the middle of 2008 this yuan
rise has suddenly stopped flat. This persisted through all
the mid-panic currency turmoil too, which is extremely unlikely
unless China has a new de-facto yuan-dollar peg.

Regardless of how
managed this exchange rate has been in the last 6 months, it means
the yuan-gold price looked nearly identical to dollar gold’s. So
Chinese investors certainly won’t be impressed with gold’s panic
performance either. This is unfortunate since China is the world’s
biggest growth market for gold investment demand. On the bright
side, when US dollar gold runs higher as
its fundamentals
suggest is inevitable, yuan gold will march higher in lockstep if
Beijing tries to maintain this apparent new currency peg.

Of course Indians
are collectively the world’s biggest gold investor, so the rupee
gold price is very important to the health of this global gold
bull. Thanks to a rupee collapse during the stock panic to dismal
levels underneath where its secular bull started in mid-2002,
rupee gold has been very strong. In fact, it surged to new bull
highs during the stock panic and ended 2008 near these levels. This
will be very encouraging to Indian gold investors, especially since
their own stock market was ripped to shreds by the global selloff.

During all this
turmoil, India’s deep cultural affinity for gold investment was
strongly affirmed. Gold remained high and forged higher when all
other assets were burning to the ground. It preserved and grew
wealth even while the local currency utterly collapsed. This can
only help future gold investment demand within the world’s largest
gold consumer. The rupee gold price is an important one to watch
thanks to India’s enormous influence in the global gold markets.

Similar to
Britain, in Australia gold soared to radical new highs too. Even
more impressive, it sustained stellar new levels leading into
year-end even while the stock-panic fears rapidly bled away. This
is dream performance for gold during a financial panic, just the
kind of thing American investors hoped to see. With their
natural-resource-heavy economy Australian investors have always been
more open to gold investing than Americans, and these major new gold
highs will only spur even bigger investment demand.

Also, like the
euro, the Australian dollar has been in a powerful secular bull
market thanks to the US dollar bear. Yet Aussie gold has still
climbed 189.2% at best despite a 102.9% rally in the Australian
dollar. And while you might think Aussie gold will collapse as the
local currency recovers from its panic selloff, this isn’t
necessarily the case in Stage Two. If global investment demand
drives up gold prices faster than the US dollar falls, highly
likely, then gold in Australian dollars shouldn’t give back much of
its panic spike.

Not only is South
Africa a top global gold producer, its currency is the most
important in Africa. But this isn’t saying much, as it has still
been weak since early 2005 despite the US dollar bear. This has
helped drive gold in rand up to the biggest bull-to-date gains seen
out of all 10 of these currencies. Already weak, it shouldn’t be
surprising that the rand crashed yet again in response to the
panic-driven US dollar rally. This drove gold to fresh new all-time
rand highs which will encourage South African gold investment.

Ten charts is a
lot to digest in one sitting, I know. But to understand how gold
really did during late 2008’s devastating stock panic, you really
need to consider all these currencies concurrently. The takeaway is
gold’s panic performance ranged from excellent to spectacular in
7/10ths of these currencies which include the very important euro
and British pound. Only the US, Japan, and China saw local-currency
gold charts that looked weaker than investors hoped during the panic
episode.

So unlike
lamenting American gold investors, the great majority of the world’s
investors witnessed strong gold performance in recent months. Since
demand for any investment grows with higher prices, gold investment
should accelerate substantially in 2009 as global investors see how
gold could have protected and grown their capital even while
everything else was melting down around them. You couldn’t hope for
a better advertisement for the merits of gold investing.

The sharp US
dollar rally that drove the poor gold performance in the US and
China (and maybe Japan) was an unsustainable anomaly. Acute panic
conditions generating extreme fear spawned it, but this fear is
abating and those panic conditions no longer exist. And the US
dollar is already reflecting this as its panic-driven rally started
failing the day the US stock markets bottomed. As more flight
capital emerges from its temporary hideout in US Treasuries, this
dollar weakness will probably persist on balance.

For many
structural reasons totally unrelated to the stock panic,
gold’s
fundamentals remain awesomely bullish. Its strong performance
during the stock panic in most of the world is only icing on the
cake that will drive additional investment demand. And while gold
itself is destined to head much higher in the coming years, the
stocks of its producers should far exceed its gains. They were
driven to
ridiculously silly levels in the stock panic and have yet to
properly reflect today’s gold prices, let alone gold’s future
potential.

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The bottom line is
gold’s performance during late 2008’s epic stock panic did not look
anywhere near as bad to most of the rest of the world as it did to
American investors. Unfortunately our dollar-centric worldview
greatly distorted gold’s true performance. It is a big mistake to
read too much into dollar gold’s recent technicals that were driven
by an incredibly anomalous panic-driven dollar surge that is already
reversing.

Rather than
dampening investors’ enthusiasm, gold’s new bull highs achieved in
the midst of the panic in much of the world will only accelerate
gold investment demand. Post-panic, investors everywhere are much
more conscious of risk and diversification. Increasing numbers will
begin the time-honored best practice of always having some material
fraction of one’s total investment portfolio deployed in physical
gold.